What if you could buy $25 gift cards for $20 and still redeem them at $25? Would you take this deal immediately?
Why would this deal intrigue you? Because you would essentially be buying money ($5) for free?
This concept is the idea behind buying preferred shares on the stock market. The more you research and follow preferred shares, the more great deals you encounter.
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Explaining preferred shares. Most people have never heard of preferred shares. Heck, the average person probably doesn’t know about dividend-paying stocks.
Let’s change that today. First, read my five-part series on preferred shares (101, 102, 103, 104, 105). To summarize, preferred shares sit above common stocks on the food chain.
Preferred shares function similarly to bonds, as they have a par value. The typical par value is $25.
Getting income from preferred shares. When a company mints preferred shares, they create dividend payments at a fixed rate and schedule.
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For example, let’s say Verizon creates a $25 preferred share that pays $1.75 annually—giving it a 7% dividend yield.
You could buy it at par value ($25) and still get an excellent yield (7%). However, the fun in collecting preferred shares is getting your income at a discount.
If you purchase that same preferred at $20, your dividend yield would be 8.75%. And you also get another bonus.
Capital gains from preferred shares. Preferred shares do not appreciate in value over time like common stocks.
The best way to receive capital gains from preferred shares is at the time of purchase. If you purchase $25 for $20, you will still receive $25 when the company redeems the share, just like a gift card.
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Sometimes preferred shares can trade above their $25 par value as well. This is usually when treasury yields are low, and people seek yield.
For example, if the 10-Year Treasury Note has a 2% yield, people will run to preferred shares that may be over 6%. As more people seek these shares, their value rises, yet their yield decreases.
The rule of 72. After reading “The Billionaire’s Secret,” I became a massive fan of the rule of 72. Using the rule of 72, you can find out how long it takes to receive your initial investment back.
To use the rule of 72, you divide 72 by the dividend yield. The answer is how long it will take to return your investment via dividends.
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If you had a dividend yield of 7%, it would take 10.2 years to get your money back (72/7). If you had a dividend yield of 8.75%, it would take 8.22 years (72/8.75).
When investing in preferred shares, you want to receive your initial investment back as quickly as possible.
The power of searching. The hardest part of purchasing preferred shares is finding them. The best way to find them is to consistently read Seeking Alpha and Preferredstockchannel.
If you find a preferred share you may love, buying it’s a good idea, even if it’s at par value. Buying it ensures you will never lose track of it again.
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It also allows you to see the ebbs and flows of the market every time you log into your brokerage account.
I often make a purchase decision by logging in and seeing my preferred share in the red. I purchase more immediately if it is one of my favorite preferred shares.
Preferred shares in your income portfolio. Preferred shares are just one of my six types of income investing.
Each type has its own method of purchasing. Preferred shares are all about the thrill of the chase. You cannot purchase fractional shares of preferred shares (from what I can tell).
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Therefore, only larger full-service brokerages, like Wells Fargo and Charles Schwab, offer preferred shares.
Preferred shares are a great addition to your portfolio; however, the company can call them after a specific date.
You must be aware of the call date and ensure you don’t have too many preferred shares maturing simultaneously.
You can use a laddering process, but it’s not required. Most preferred shares trade after the call date for a while. You just never know when the company can call the share, leaving you with a hole in your income.
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The importance of dividend dates. You also want to look at the payment dates for your preferred shares. Like dividend-paying stocks, most preferred shares pay quarterly.
Therefore, some pay in January (Jan, Apr, July, Oct), February (Feb, May, Aug, Nov), and March (Mar, Jun, Sep, Dec).
Luckily, Preferredstockchannel clearly details the payment dates, so you are not left guessing. For monthly payers, turn to closed-end funds and then layer on quarterly paying preferred shares.
Life as a preferred share investor. Life as a preferred share investor is exciting. I bought a preferred share in 2020 for $16 with a yield of 16%.
Within a year, it returned to its par value of $25. I keep the excellent yield and the extraordinary capital gains.
That’s preferred share investing in a nutshell. It can be dangerous to chase yield alone, so ensure the company is on solid footing.
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Conclusion. Next time you think of preferred shares, imagine a gift card. You can buy your preferred shares at a discount, receive dividends, and get the par value at redemption—what a fantastic gift.
If you are nervous about preferred shares, stick to the big corporations like Public Storage (PSA), Bank of America (BAC), and AT&T (T).
You can also purchase preferred shares inside a preferred share fund like (PFFA). If you follow the fund, you can find its (typical) par value.
You can purchase PFFA at a discount if you understand its average dividend yield. However, buying individual preferred shares gives you the best opportunity for out-sized returns. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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